Edited version of private ruling

Authorisation Number: 1011549148586

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Ruling

Subject: Fringe benefits tax - in house fringe benefits

Question 1

Will the reimbursement under a salary packaging arrangement of up-front expenses of an employee of the employer for an associate of the employee constitute an 'in house residual expense payment fringe benefit' for the purpose of subsection 22A(2) of the Fringe Benefits Tax Assessment Act 1986? (FBTAA)

Answer

Yes

Question 2

Will the reimbursement under a salary packaging arrangement of an up-front expense of an employee of the employer for themselves constitute an 'in house residual expense payment fringe benefit' for the purpose of subsection 22A(2) of the FBTAA?

Answer

Yes

Question 3

Will the payments of an up-front expense by the employer on behalf of its employee constitute an 'in house residual expense payment fringe benefit' for the purpose of subsection 22A(2) of the FBTAA?

Answer

Yes

This ruling applies for the following periods:

Year ended 31 March 2010

Year ended 31 March 2011

Year ended 31 March 2012

Year ended 31 March 2013

The scheme commences on:

1 April 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The employer is:

· a not for profit institution established by government;

· a deductible gift recipient; and

· an endorsed charitable institution.

The main activities undertaken by the employer are the provision of services.

The employer's functions include:

· to encourage and undertake research and

· to aid directly or indirectly the application of science and technology to industry.

The employer may enter into business arrangements and borrow money.

The employer provides services to many Australian and international clients. These services are also provided by other entities for profit.

Under its salary packaging program the employer is offering to:

· reimburse expenses of employees who receive services from the employer and

· reimburse expenses incurred by employees for associates who receive services from the employer.

The employer currently makes payments on behalf of certain employees who incur expenses in obtaining services from the employer. These are not provided under salary packaging.

The employees will provide the necessary documentary evidence to the employer, before the date on which the annual fringe benefits tax return for the employer is lodged.

The services received by the employees of the employer and the associates of the employer's employees are identical or similar to those offered to the public.

Employer services are provided to members of the public. None of the services will be mainly provided to the employees of the employer and the associates of the employer's employees.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Subsection 22A(2)

Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 Section 45

Summary

The benefits provided are in-house residual expense payment fringe benefits for the purposes of subsection 22A(2) as the employer does meet the necessary requirements.

Detailed reasoning

Questions 1 & 2

Under the proposed arrangement, the employer will reimburse expenses of:

· employees who receive services from the employer and

· employees who incur expenses for associates who receive services from the employer.

It is agreed that fringe benefits will arise from the taxpayer's actions.

In general terms the valuation of a fringe benefit will depend on whether it is an in-house fringe benefit or an external fringe benefit.

An in-house fringe benefit is defined in subsection 136(1) of the FBTAA.

Under section 20 of the FBTAA where an employer either:

· makes a payment to a third party to discharge an obligation of an employee, or

· reimburses the employee for expenses incurred by the employee

an expense payment benefit will arise.

Therefore since the employer intends to reimburse employees for expense payment fringe benefits will arise.

An in-house expense payment fringe benefit is defined in subsection 136(1) of the FBTAA to mean:

· an in-house property expense payment fringe benefit; or

· an in-house residual expense payment fringe benefit.

Both of these terms are also defined in subsection 136(1) of the FBTAA. For the purposes of this ruling the relevant definition is an in-house residual expense payment fringe benefit.

In considering this definition it is necessary to answer the following questions:

1. Was the employee's expenditure incurred in respect of the provision of a residual benefit (other than a benefit provided under a contract of investment insurance)?

2. Who was the residual benefit provider?

3. Is the residual benefit provider the employer or an associate of the provider?

4. Did the residual benefit provider carry on a business?

5. If the residual benefit provider carried on a business, did the business consist of, or include the provision of identical or similar benefits?

6. If the business consisted of, or included the provision of identical or similar benefits, where they provided principally to outsiders?

7. Will documentary evidence of the expenditure be provided to the employer before the declaration date?

1. Was the employee's expenditure incurred in respect of the provision of a residual benefit?

Section 45 defines a residual benefit. The underlying benefit to which the expenditure relates is the provision of the employer's services. As the provision of the employer's services does not fall within any of the specific categories of benefits within Subdivision A of Divisions 2 to 11 (inclusive), it is a residual benefit.

2. Who was the residual benefit provider?

Provider is defined in subsection 136(1) of the FBTAA to mean 'the person who provides the benefit'.

Person is also defined in subsection 136(1) of the FBTAA. The employer is a person for the purposes of the FBTAA.

3. Is the residual benefit provider the employer or an associate of the provider?

The residual benefit provider will be the employer of the employees who will be reimbursed under the arrangement.

4. Did the residual benefit provider carry on a business?

The FBTAA does not define what constitutes carrying on a business for the purpose of the application of the in-house provisions. It does however define "business operations" in subsection 136(1) of the FBTAA.

The term 'business operations' is discussed in paragraph 9 of Taxation Ruling TR 2000/4 Fringe benefits tax: meaning of business premises.

The term business is also defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

The Macquarie Dictionary, [Multimedia], version 5.0.0, 1/10/01 describes the expression 'be in business' as:

to earn a living from a commercial activity;

Colloquial: to be carrying out an activity, enterprise, etc., successfully.

These definitions indicate the requirement to be carrying on a business for the purpose of the FBTAA is capable of having a wide meaning.

Support for this conclusion was provided by the High Court decision in NT Power Generation Pty Ltd v Power and Water Authority [2004] HCA 48; 219 CLR 90; 210 ALR 312; 79 ALJR 1 where the phrase carrying on a business was construed broadly.

In its decision the Court stated at paragraph 52 that the Power and Water Authority was carrying on a very substantial business. In making this statement the Court referred to the references to carrying on a business contained within the Power and Water Authority's internal documents, its annual report which discussed indicators like rate of return on assets, the debt to capital ratio and the sales revenue.

Further at paragraph 66 the court stated:

While the word business in any particular context takes its meaning from that context, normally it is a wide and general word. Its meaning in the Act [Trade Practices Act 1974] is widened by s 4(1), since business includes a business not carried on for profit.

In the earlier decision of NT Power Generation Pty Ltd v Power & Water Authority [2001] FCA 334, Mansfield J stated at paragraph 236:

Whether or not a business is being carried on is a question of fact, having regard, for example, to the nature of the activities carried out, and their continuous or repetitive character: Smith v Capewell (1979) 142 CLR 509; Fasold v Roberts (1997) 70 FCR 489.

Paragraph 13 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production, also provides a number of indicators which are relevant to determining whether a person is carrying on a business for income tax purposes. The indicators are as follows:

· whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

· whether the taxpayer has more than just an intention to engage in business;

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

· whether there is repetition and regularity of the activity;

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

· the size, scale and permanency of the activity; and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

In considering these indicators to the employer under this arrangement it is accepted that the following points are indicative of a business being carried on.

· There is repetition and regularity of the activities.

· There are other organisations that provide the same services in the course of carrying on a business.

· The activities are conducted on a considerable scale in terms of the number of employees, the number of customers, the size of the budget.

· There is a permanency of the activities.

· The activities are planned, organised and carried on in a businesslike manner.

· The activities have a significant commercial purpose or character and are directed at making a profit.

· The delivery of the employer's services generates revenue and increase market share.

· The employer has the power to enter into business.

Based on these facts, it is accepted that the employer is carrying on a business.

5. If the residual benefit provider carried on a business, did the business consist of, or include the provision of identical or similar benefits?

This criterion involves identifying both the benefit that was purchased by the employee and the benefits that were provided as part of the business.

Having identified the benefits it is then necessary to determine whether the benefit purchased by the employee was identical or similar to the benefits provided as part of the business.

Guidance for determining whether the benefits are identical or similar is provided by paragraphs 202 to 217 of Taxation Ruling TR 2007/12 Fringe benefits tax: Minor benefits.

The commercial activities undertaken by the employer include the provision of services to customers.

The benefits that will be purchased by employees during an FBT year will be the employer's services to themselves or their associates.

In applying the definitions of identical or similar, the benefit purchased by the employee will be identical to a benefit provided as part of the business where the services provided to the employee or the employee's associate are the same as those provided to other customers who are not employees or associates of employees. It is accepted that the services provided to the employees and the associates of employees are identical or similar to those offered to other customers.

6. If the business consisted of, or included the provision of identical or similar benefits, where they provided principally to outsiders?

Outsider is defined in subsection 136(1) of the FBTAA to mean:

a person not being:

(a) an employee of the employer;

(b) an employee of an associate of the employer;

(c) an employee of a person (in this definition referred to as the "provider") other than the employer or an associate of the employer who provides benefits to, or to associates of, employees of the employer or an associate of the employer under an arrangement between:

(i) the employer or an associate of the employer; and

(ii) the provider or another person; or

(d) an associate of an employee to whom any of the preceding paragraphs apply.

In applying this definition, employees of the employer and their associates will not be outsiders. Consequently, the reimbursement of the expenses will not be in-house residual expense payment fringe benefits if the service is principally provided to the employees or their associates.

Principally is not defined in the FBTAA. The Macquarie Dictionary [Multimedia], version 5.0.0, 1/10/01, defines it as '…chiefly; mainly'. To satisfy this requirement it is necessary that the employer provides its services mainly to outsiders.

The facts of the arrangement state that none of the services will be mainly provided to the employee or employee's associates. It should be noted that in this context, the definition of employee in subsection 136(1) of the FBTAA refers to a current employee, a future employee or a former employee.

We accept that the business carried on by the employer includes the provision of identical or similar benefits principally to outsiders and that this requirement is satisfied.

7. Will documentary evidence of the expenditure be provided to the employer before the declaration date?

Declaration date is defined in subsection 136(1) of the FBTAA as being the date of lodgement of the return of the fringe benefits taxable amount, or such later date as the Commissioner allows.

Subsection 136(1) of the FBTAA provides that the term documentary evidence means:

(a) if the expense was incurred on or after 1 July 1997 - a document that would constitute written evidence of the expense obtained in a way described in Subdivision 900-E of the Income Tax Assessment Act 1997 if the expense were a work expense, and Division 900 of that Act applied to the person;

The employer currently has a policy in place that requires employees to provide documentary evidence when expenses are paid on their behalf or reimbursed. This indicates that the employer is aware of its record keeping requirements and that this requirement will be satisfied.

As the necessary requirements of the definition of in-house residual expense payment fringe benefit will be met, the benefits provided under the arrangement will be in-house residual expense payment fringe benefits for the purposes of subsection 22A(2) of the FBTAA.

Question 3

Summary

The benefits provided are in-house residual expense payment fringe benefits for the purposes of subsection 22A(2) of the FBTAA as the employer meets the necessary requirements.

Detailed reasoning

The up front payment of expenses is also an expense payment benefit under section 20 of the FBTAA. It is treated in the same way as the reimbursement of expenses. Therefore, the reasons for decision are the same as for questions 1 and 2.

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